Good day and thank you for standing by and welcome to the InnovAge Fiscal Third Quarter 2022 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your host today, Ryan Kubota, Director of Investor Relations. You may begin.

Thank you, operator. Good afternoon and thank you all for joining InnovAge’s fiscal 2022 third quarter earnings call. With me today is Patrick Blair, President and CEO; and Barbara Gutierrez, CFO. Dr. Melissa Welch, Chief Medical Officer, will also be joining the Q&A portion of the call. Today, after the market closed, we issued a press release containing detailed information on our quarterly results. You may access the release on our company website, innovage.com. For those listening to the rebroadcast of this call, we remind you that the remarks made herein are as of today, Tuesday, May 10, 2022, and have not been updated subsequent to this call. During this call, we will refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our third quarter 2022 press release, which is posted on the Investor Relations section of our website. We will also be making forward-looking statements, including statements related to our remediation measures, including scaling our capabilities as a provider, expanding our payer capabilities and strengthening our enterprise functions, future growth prospects, the status of current and future regulatory actions and other expectations. Listeners are cautioned that all of our forward-looking statements involve certain assumptions and are inherently subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our Form 10 annual report for fiscal year 2021 and our subsequent reports filed with the SEC, including our quarterly report on Form 10-Q for our fiscal third quarter 2022. After the completion of our prepared remarks, we will open the call for questions. I will now turn the call over to our President and CEO, Patrick Blair. Patrick?

Good morning. Thank you, Ryan, and thank you all for joining us today. Before jumping in, I’d like to again express my gratitude to our InnovAge employees who put our participants at the core of what we do every day, and for their selfless contributions during a difficult time; our federal and state partners for their partnership and support as we work through the audits; and to our shareholders for their continued interest in the company. There is a lot to cover today. So our prepared remarks will be a bit longer than usual. It’s a challenging period for InnovAge, and this quarter’s results reflect the significant transformation we’re undertaking. I’m confident we’ll manage our situation in the right way, and we’re optimistic about the company’s future, both in terms of the markets we serve and the solutions we offer. While the current sanctions represent a major challenge, I’m generally excited about the market opportunity, the foothold we have in important markets, our incredible PACE clinical expertise and the amazing employees who are proud to work at InnovAge. I have been encouraged by our progress over the last 90 days. And while it’s certainly requiring a lot from them, it’s clear that our employees have the motivation and ability to overcome the challenges we’re facing. Their efforts are frankly inspiring, and the improvements, while still early, are becoming visible. As you know, we are currently under sanction in our Sacramento Center as well as our 6 centers in the state of Colorado. As a result of these sanctions, we’re currently unable to grow our census in these markets. We’re following the lead of CMS and state government partners, and working with them to ensure they are satisfied completely with the work we are doing to address the audit findings. The…

Thank you, Patrick. I will provide some highlights from our third quarter fiscal year 2022 performance. Given the impact of Omicron during the period, in some cases I will refer to sequential comparison to our second quarter of fiscal 2022 in order to provide a more meaningful view of our performance. As of March 31, 2022, we served approximately 6,800 participants across 18 sectors. Compared to the prior year period, this represents an ending census increase of 2.1%. Compared to the second quarter of fiscal year 2022, this is a decrease of 3.5%. We reported approximately 20,630 member months for the third quarter, a 3.4% increase over the prior year and a decrease of 2.6% over the second quarter of fiscal 2022. Sequentially, the enrollment freeze in Colorado had the greatest impact on member months and census in the third quarter. Additionally, as we indicated in our second quarter remarks, towards the end of the second quarter and continuing into the third, we experienced an increase in total deaths. While not uncommon during the winter months, total deaths coupled with added enrollment growth pressure as a result of the Omicron surge also impacted our census growth. The Omicron surge affected our ability to interact directly with potential new participants, and cause delays and lengthening of the enrollment process. Revenue in the third quarter of fiscal year 2022 increased to $177.4 million or approximately 13.5% compared to the third quarter of fiscal year 2021. Year-over-year growth drivers include an increase in census, the calendar year increase in Medicare rates effective January 1, 2022, and an increase in Medicaid rates which include temporary rate increases from the American Rescue Plan Act or ARPA in Virginia and Colorado. Specific to Colorado, we recorded a true-up of ARPA funds for the first half of…

Thank you. [Operator Instructions] And our first question comes from Jeff Garro from Piper Sandler. Your line is now open.

Yes. Good afternoon and thanks for taking the questions. I guess I’ll start on the cost side of things. You cited five items pressuring center level contribution margins. Could you help us categorize which ones of those you feel are near-term and which ones might persist for some time?

Thank you for the question, Jeff. I’ll get it started. Then I’ll hand it over to Barb. Yes. First thing I’d point out is the COVID-related cost, clearly one where we saw a spike in January I think with roughly half the population that contracted COVID in January. And those admissions were up for us as well as some of the increases in utilization of skilled nursing days and some of the ancillary costs surrounding that. I am going to let Barb go a little bit deeper into the drivers.

Yes. Thanks for the questions. So as Patrick said, certainly in the third quarter, a significant portion of our higher costs as it relates to external provider costs, were related to the Omicron surge. So of those excess costs, about 50% of those excess costs in some way, form or fashion were attributable to that surge, whether that was inpatient, medical respite, ongoing specialty care. And while we have seen the – seen COVID abate going into the fourth quarter, we expect those costs to come down in the short-term but not completely go away. As you know, our participants are inherently frail and have a number of comorbidities, and so what we are experiencing is a long tail, if you will, as it relates to those external provider costs for those participants. So the good news is we have seen the COVID rate decrease towards the end of the third quarter and into the fourth quarter. But again, those costs won’t go to zero in the fourth quarter. There is a tail associated with that. Secondly, the wage increases were a factor as well. And like I think, everyone in the healthcare industry, we’re seeing a lot of pressure and a tight labor market, and we’ve done a number of increases related to our staff as well as trying to close the gap on some of our staffing. So that will continue as well. We did have some more one-time costs in nature related to organizational realignment that will not reoccur in the fourth quarter or in the near-term. And then just some of the overall other costs, we foresee sales and marketing are nearly flat quarter-over-quarter, and that really results from the sanctions. We see that being pretty constant. And our G&A are really investments in transformational activities as well as some compliance activities. And we will see that continue a bit to the fourth quarter as well. I think I answered them all.

Excellent. Yes. Great. All super helpful. Maybe to follow-up a little bit, focusing on the cost of care line and just trying to think about – I think great in the tight labor market, you’re able to add 100 net new FTEs. So I’m curious what roles you were able to hire people for? And just trying to parse out how much of the increased cost of care, despite where census has trended, is related to wage pressures, and how much is related to all of those efforts that Patrick discussed around you becoming a stronger provider and delivering a stronger value for your members?

It’s a bit of each of those items. We have seen in terms of the wage pressures in the high single digits compared to a year ago, and I think that’s been consistent with what we reported on other calls, that kind of high single digits. And so that is definitely a factor. And then adding the new participants – sorry, the new employees is another factor. We are continuing to work on that and strengthening our recruiting. So I think it’s a bit of both.

Yes, I might just add on and just reinforce that we’ve identified a core set of physicians that we really put into the critical hiring bucket. They include nurses and CNAs, personal care workers in various therapies and social workers. And if memory serves me, the last couple of months or at least in the last quarter, we’ve had roughly about 200 or so of those that we’ve sort of carried as a vacancy. And I think we’ve made progress on at least 30% of those just in the last 6 weeks to 2 months. So we are making – we’ve got a very focused effort on these critical positions and are really, I think, doing a great job attracting people in the company and attracting people to the mission and purpose of the business. And so we’re starting to see some improvement in the recruitment of these critical roles.

Good to hear. Thanks for taking the questions, again.

Thank you. And our next question comes from Sarah James from Barclays. Your line is now open.

Thank you. I wanted to go back to the comment that Barb made earlier about the ARPA regulatory change in Colorado. Just want to confirm that was 30% cost increase with no rate offset. And then I was going through the last couple of calls. I guess you guys flagged a 5.3% rate increase for Colorado and Virginia in November related to housing costs. So, I just want to understand if we look at this as like a 2-year run rate, what exactly is going on with housing costs? And how should we think about that as a percent of your total cost structure?

Thanks, Sarah. Clarifying the Colorado ARPA sorry, I paused there because there was a little bit of an echo. Let me just clarify that. So, I think in the remarks, I said there was no direct reimbursement. There is definitely some indirect reimbursement. And so we received some ARPA funds, we received as a matter of public policy adjustment related to ARPA. So, we have received a couple of increases there. But the structure of it is not a direct one-for-one reimbursement. And the philosophy there is, we are being reimbursed through some of the ARPA and inherently through our rate structure. So, we are still in discussions with the State of Colorado as it relates to FY ‘23 rates. And you did understand correctly, it was a very significant increase for Alps [ph]. It was over 30%. And a significant portion of our participants in Colorado actually live in Alps, which is why it’s pretty significant for us. The other increases we mentioned in the previous quarters. We also received from Virginia about a 2.5% increase related to ARPA. And in some part, that covers some of that housing increase. We do not have the same level of housing in Virginia. So, it’s not the same issue from a reimbursement perspective.

Can you size housing costs for us? Like what percentage of your cost of care line is it, or how should we think about factoring in some of these increases into the model?

Yes. So, probably not off the top of my head, but again, think about over a third of our participants in Colorado reside in Alps. And I think that’s the way to think about it.

Okay. Thank you.

Thank you. And our next question comes from Jamie Perse from Goldman Sachs. Your line is now open.

Hey, good afternoon Patrick and Barbara. Patrick, maybe to just start with you on the eight initiatives you outlined. Obviously, a lot going on to remediate the audits and just improve quality of care overall. How would you kind of characterize where you are in terms of establishing these initiatives, the timing that we should be thinking about for some of the different initiatives, where the easier lifts are versus some of the more challenging longer term lifts? Just a little bit more color on how we should think about, I don’t know, phasing or implementation of these key initiatives going forward?

Sure. Thanks for the question. I would start by saying that we are making progress on all eight of these. I mean clearly, there is different impact and value for all of them, but we are simultaneously executing sort of full speed ahead on all eight. If I think about where it all starts, clearly the critical personnel gaps is the foundation for everything. And as I mentioned, we have identified the critical personnel that are making significant progress. I think I said 30% of some of what’s been sort of in our vacancy run rate we have been able to fill. When I think in terms of those that I think are having the greatest near-term impact. Two I would call out would be, one, scheduling care with outside providers. We have made a lot of progress on building our tools and our processes to ensure that our people are being scheduled, and external providers, as quickly as possible and as timely as possible. So, that is an area where getting people to their provider really starts the care delivery model for us. And so that’s critically important. We are making great progress. Our – the telephonic channel with our phones just being available to our participants and their caregivers and make sure that every call that comes into the center, we are returning that call on a timely basis and then we are documenting the needs of the population. I think that’s an area where we are making really good progress on. One of the areas, I think is going to have a longer tail on it, it probably won’t surprise you, is sort of strengthening our home care network and the reliability. This really ties back to the people constraint, is finding the right number and the…

Okay. Thanks. That’s really helpful. I wanted to follow-up just on the status of the Sacramento facility. I know the cap is in place there and your – I guess the question is, what’s the level of oversight right now by auditors? Are they monitoring you on a kind of day-to-day basis, or what does that look like? And is it still right to think that there will be a phase you go through where they are moderating pretty closely and then they let you operate more independently for a while? And then beyond that is when the enrollment freeze might be lifted. And then if I could just sneak in one more, just if Virginia and Pennsylvania, what the status of conversations is like there, what their familiarity is with your other audits, and how you kind of characterize the risk of changes you are seeing right there? Thanks.

Sure. I appreciate the question. Starting with Sacramento, I think you articulated sort of the audit cycle well. There is always a great deal of engagement with CMS in the state. But you are correct in that we are, I will say, at the precipice of where CMS’s level of monitoring is done much more through reporting oversight. So, there are specific measures, which – nine of them that we are being measured against in Sacramento, and we are reporting that information to CMS sometimes in a biweekly or monthly basis. And we are very pleased with the progress we are making. And if we can keep that progress up, you are correct in that the next step would be for CMS to give us some time to make sure those changes and those results are sticking, and then come back in and do an audit again, a quick audit, to see where we are to make sure the changes are stuck. And it’s our understanding if that all goes well, then we are positioning ourselves for sanctions to be lifted. But of course, that’s always in the discretion of CMS. So, I would just say, really pleased with the team’s progress in Sacramento. As it relates to Virginia and Pennsylvania, how I would describe that is, our close work with CMS across multiple markets now, and the themes they are seeing across our markets, and the progress we are making across addressing those deficiencies, I believe CMS is acknowledging that we are making good progress. We are focused on the right issues. We are remediating things timely. We have got a strong communication, open communication channels between us. And as a result, we have not received any notice from CMS or the State of Virginia or Pennsylvania on any planned audits. Of course, they can happen at any time, but we always receive a notice in advance, and we have not received anything yet. So, I think our belief is, we are working closely with CMS, and they are very aware of our themes and our progress. And we are applying the learning to all the markets. So, anything we learn in Sacramento, New Mexico, Colorado, we are bringing those same things to Virginia and Pennsylvania proactively.

Okay. Understood. Thanks for the update.

Thank you. And our next question comes from Matt Larew with William Blair. Your line is now open.

Hi. Thanks. Good afternoon. Barb, I wanted to follow-up on your comments. Obviously, you are not giving guidance, but you did kind of describe what you are seeing in terms of current trends with enrollment at non-sanction centers returning. I do want to clarify, though, with about two-thirds of your census following into sort of Colorado and New Mexico and the California centers, and 2% attrition per month, I mean we should be expecting sequential declines in census for some period of time here. Is that fair to say? I just want to make sure that we are not misreading the commentary about enrollment returning in the non-fiction centers into something that’s not going out company-wide?

Yes. So, thanks for the question, Matt. The only clarification I would make is that the centers on sanction are Sacramento – currently on sanctions, Sacramento and the Colorado centers. So, I know in your question there, you included other California centers in New Mexico which are not currently on sanction. And then in addition to that, there is Virginia and Pennsylvania.

But I guess just to clarify, your sort of internal expectation given that they are following the path of Sacramento and Colorado is that they will eventually be on showing you out there a similar process, or sort of what’s in your operating model for that?

That’s not what we are assuming, especially in the comments that I gave just a bit ago. So, the comment is, again, on the non-sanctioned centers.

Yes, this is Patrick. I think I might just punctuate the point in terms of internal expectations. As I have said before, this is entirely in the discretion of our regulators. But I think internally, we recognize that both CMS and states have a broad range of options available to them when it comes to enforcement of audit deficiencies. And a corrective action plan with an enrollment freeze is just one of the several options that CMS or state has available to them. So, I think as we think about each market, we think about it on its own merits and we think about the latitude that CMS has, and that each market that while the themes may be similar, the actual severity and frequency that – of the deficiencies could vary by market and could lead to very different outcomes. And so that’s sort of how we are thinking about it. And then I think as we think more broadly to markets that are under sanction in addition, we also think about the proactive nature of our work to address audit deficiencies that maybe all hasn’t occurred yet, but we are already at that location, looking at the opportunities, looking at what we have learned from the other markets and seeing if there is an opportunity to get ahead of it. So, I would just add that color to Barb’s comments.

Okay. That’s really helpful, Patrick. And then, Patrick, maybe just sticking with some additional commentary, you referenced some of the corrective actions that you have taken. You also said you identified sort of root cause for all of them. Curious, could you share with us what, in your view, the root cause a lot of these issues were? And the reason I am asking is, I think it would be helpful to understand if it was deficiencies, and people or processes or technologies in order to help frame what the type of investments are that are going to be required to really solve not a surface level and a root cause across the organization?

Sure. I would happy to. I would first say that for any deficiency, I always think of it, we always think of it in terms of people, process and technology. And although business process automation or introducing new technology can be expensive, I think what we are finding in more cases than that is that, simple technological advancements or automation can make a big difference in the deficiencies we need to close. It very much is about the fundamentals of having the right people, having solid business processes and policies and procedures that are followed, and having tools that help our employees be efficient and enable them in the work that they are doing. In terms of the root causes, just working from sort of top of mind here, it’s things like ensuring our medical records are documented with all the required data elements, much more people and policy, procedure focused, ensuring that our care plans are complete and kept timely, a lot about training and people in process. The heart of our business is this multifaceted interdisciplinary care team at the center level, making sure that team is each day capturing input from all other team members. Whenever that information is available, it is been documented in the EMR or in other tools that feed the EMR. There, you are getting to get it, training of people, process and tools to capture data, making sure that our service orders are being scheduled on a timely basis, making sure that when a participant or a caregiver requests a service that we are identifying that appropriately, and we are documenting it. So, see, you can get a feel for it. Those would be the things that I would say are root causes of our compliance deficiencies. They are the fundamentals of basic blocking and tackling. And the eight initiatives that I articulated, I have a great deal of confidence that if we execute flawlessly on those eight initiatives by the end of the year, they substantially account for, and it will address all of our audit deficiencies. And then next year and the year after, we begin thinking about how do we take those to the next level and become more efficient, more automated, more controlled. Hope that’s helpful.

That’s really helpful, Patrick. Thanks for all the commentary.

Thank you. And our last question comes from Andrew Lothian from JPMorgan. Your line is now open.

Hi. This is Andrew on for Lisa Gill. I just wanted to go back to your comments on patient acuity going up over time. So, in light of the freezes, I was wondering how you are thinking about driving growth in existing markets, given the compressed marketing spend. The limited growth would probably seem to indicate that cost of care would remain a bit elevated relative to historical patterns. So I was wondering if you had any incremental color on that? Thank you.

Well, I can share a little bit on the sales side and then if someone else on the team wants to weigh in. As it relates to our sales and marketing costs, we are very cognizant of our ratios for sales and marketing, and we are going to be very – we have been very smart about how much of a cost structure we maintained given that we have markets under sanction. And we have taken steps already to reduce costs in the markets today. And then on the marketing side, because these are highly variable costs, we have already taken costs out of the marketing side of the equations, which is going to allow us to move more quickly. We are also deploying sales resources in sanction markets to, let’s call it, participant experience and retention efforts in both sanctioned markets and non-sanctioned markets. And that’s relevant because we are very much focused on that portion of our disenrollment rate that we can control, and we are using those resources from a participant experience perspective to help with some of that disenrollment. And I think as Barb mentioned, we are starting to see some of that play through in the current period. As it relates to the risk pool, I am going to ask Melissa to say a little bit about that. But you are exactly right that we have had quite a few participants contract COVID as they leave the hospital. Many of them were no longer able to be at home and reside in higher cost settings. And especially in a market like Colorado, where it’s one of our largest markets where we have the highest degree of sort of Alps utilization, we clearly have a challenge of not bringing in enough new lower acuity participants into the pool. And that’s something that we are very focused on, and looking for every opportunity to manage that population as well as we can. But let me ask Melissa to weigh in too.

Hi Andrew. Yes, I think Patrick captured the cause of the increased acuity. Certainly in this last quarter, COVID had a huge impact on our participants’ acuity for the quarter. Mix is important to us. So, it is going to be important for us to continue to bring in newer, ideally less sicker participants on some aspects to help dilute that. But our real focus is going to be on being able to predict the acuity. And some of the technology investments that were identified by Patrick earlier will help us to do that. Our new EMR technology is also going to help us to do that. And I think that, that ability to really predict our cohort of acuity and manage it upfront more accurately, is going to be a significant value for us in the long-term.

Yes. I might just add one last thought to that. And naturally, we have a number of initiatives that run on a daily basis where we are focused on things like the short stay and skilled nursing facility and the length of stay, as Melissa mentioned, a variety of side of care strategies that we have in place to try to address the utilization, a number of things around the use of ER and trying to reduce the unnecessary use of ER. And all these things, I think also play to highlight – really highlight the importance of a more sophisticated payer strategy and capabilities going forward, which I mentioned in my opening remarks.

Thanks for the color.

Thank you. And this concludes today’s conference call. Thank you for participating. You may now disconnect.